Do you provide your professional medical services directly to a health care institution rather than through a corporation you control? If you do, you may be paying more taxes than you have to. Generally, you can save on taxes if you provide your medical services through your own professional corporation, especially if you don’t spend all of the money you earn each year. You may also be able to save more taxes if you have a spouse or adult children earning little or no income—they may be able to earn income from providing services to your professional corporation or receiving dividends from owning non-voting shares of the corporation. That income will be taxed at a lower tax rate in their hands than in yours.
Your ability to pay less tax starts with setting up a corporation through which you provide your professional medical services. If your corporation qualifies for the small business tax deduction, the first $500,000 of its income is taxed at a preferential tax rate of 15.5%. In order for your professional corporation to qualify, you must be a Canadian resident and you must control the corporation by owning more than half of the corporation’s voting shares.
To see the potential tax savings, let’s look at the example of a doctor resident in Ontario who earns $500,000 a year. Under current tax rates, the doctor’s after-tax income would be about $288,000. If, instead, the $500,000 is earned by a corporation the doctor controls and the doctor earns a salary of $200,000 from the corporation sufficient to pay the family’s annual expenses, the corporation’s after-tax income would be about $253,500, while the doctor’s after-tax income would be about $127,000, resulting in a total after-tax income of $380,500 for the year.
If more money is needed to satisfy annual living expenses, tax efficient distributions can be paid from the corporation. For example, if the doctor has a stay-at-home spouse and two adult children at university who are shareholders of the corporation, the corporation could pay each of them a tax-free dividend of $47,000 from its $253,500 after-tax income. If the remaining $112,500 of the corporation’s after-tax income is paid to the doctor as a dividend, his/her after-tax income on the dividend would be about $76,000. The end result is that the family’s total after-tax income for the year would be about $344,000, which is $56,000 more than the doctor’s after-tax income would be if he/she earned all of the income directly.
So, is there a catch? There are various tax rules that could trip you up and reduce or eliminate your tax savings, so you will need to ensure that you properly set up and manage your professional corporation, as well as any services contracts between your corporation and the healthcare institution and between your corporation and you (and, if applicable, your spouse and adult children).
While the basic concept of providing your professional medical services through a corporation seems simple, it’s important to keep in mind that the optimal plan for you will depend on your (and your family’s) specific circumstances, as well as the nature of your services arrangement with the healthcare institutions to which you provide your medical services. Some basic things you will need to think about include:
- Ensuring that your professional corporation is not “associated” with any other corporation for tax purposes (so that the $500,000 small business deduction limit does not have to be shared with any other corporation, which would reduce the tax savings);
- Ensuring that your professional corporation earns active business income (rather than personal services business income that is not eligible for the small business deduction);
- Determining the terms of the service contract between your professional corporation and the healthcare institution, and between your professional corporation and you (and, if applicable, your spouse/children);
- Determining a reasonable fee for services provided by your spouse/children to the professional corporation so that the corporation will be able to deduct it fully; and
- Considering non-tax matters such as licensing and ongoing corporate and administrative requirements for the professional corporation.
To ensure proper planning, set-up and management of your professional corporation to get the tax savings you’re looking for, you should talk to a tax professional who works in the area and can steer you safely through all of the tax and other legal requirements.